(8) Non-current assets

Question 1

What are PPE assets?

Answer 1

PPE assets are tangible items that:

i. are held for use in the production or supply of goods/services, for rental, for administrative purposes, and,
ii. are expected to be used during more than one period

Question 2

What are PPE assets initially recorded at?

Answer 2

At cost - the amount of cash / cash equivalents paid or the fair value of the other consideration given to acquire the asset

Question 3

What is fair value?

Answer 3

The price that would be
received to sell an asset or paid to transfer
a liability in an orderly transaction between
market participants at the measurement
date

Question 4

What does the cost of an asset consists of?

Answer 4

The cost consists of the fair value of all expenditures necessary to,

1) acquire the asset and,
2) make it ready for its intended use

Costs includes:

• purchase price
• freight cost
• insurance during transit
• installation costs
• settlement costs
• stamp duty
• accrued property taxes assumed (paid) by purchaser

Question 5

Example: Cost of land includes

Answer 5

• Cash price of property
• Demolition/removal cost of warehouse
• Solicitor’s fee for land purchase
• Stamp duty on property
• Land taxes owing from last financial period

NOT INCLUDED: building of new fences on property –> this goes under Land Improvements (asset account)

Question 6

Define depreciation

Answer 6

Depreciation is the process of allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner

Question 7

Carrying amount formula

Answer 7

Carrying amount = cost - accumulated depreciation

Question 8

4 factors that contribute to the decline in economic benefit of a depreciable asset

Answer 8

1. Usage of the asset
2. Physical wear and tear
3. Technical and commercial obsolescence
4. Legal life (e.g. expiry dates of related leases)

Question 9

Straight-line depreciation method

Answer 9

When the useful life is the period over which an asset is expected to be available for use by an entity

Formula:
depreciation = (cost - residual value) / useful life

Question 10

Diminishing balance depreciation method

Answer 10

When the useful life is the period over which an asset is expected to be available for use by an entity

• Usefulness decreases each year
• Depreciation expense decreases each year as greater benefits are consumed earlier in the asset’s life

Formula:
depreciation = carrying amount * depreciation rate

*depreciation rate = 1 - [(residual_value / cost) ^ (1/useful life)]

Question 11

Depreciable amount is

Answer 11

Cost less residual

Question 12

Units of production method

Answer 12

Useful life is expressed in terms of total units of production or use expected from the asset

Depreciation cost per unit = depreciable amount / useful life (in units)

Depreciation expense = depreciation cost per unit * yearly units of production

Question 13

During the useful life of an asset, a firm may

incur costs for a) ordinary repairs, b) additions and improvements. Explain a) and b).

Answer 13

Ordinary repairs – expense

• expenses in maintaining operating efficiency of the asset
• expensed in operating statement

Additions and improvements – capitalise

• costs incurred to increase operating efficiency, productive capacity or useful life
• expenditure capitalised and depreciated over asset’s remaining useful life

Question 14

Disposals of PPE assets include

Answer 14

• Sale
• Scrapping
• Exchange

Question 15

How to record disposal of PPE assets?

Answer 15

Step 1: Update depreciation to date of disposal
Step 2: Calculate gain (or loss) on disposal
Step 3: Record the disposal of the asset

Question 16

Format for calculating gain (or loss) on disposal

Answer 16

Cost of office furniture
Less: Accumulated depreciation
Carrying amount
Proceeds from sale
Gain (or loss) on disposal of asset

• gain (or loss) = proceeds - carrying amount

Question 17

Journal entry for gain on disposal of asset

Answer 17

1. Update depreciation expense
   DR Depreciation expense
   CR Accumulated depreciation

2. Gain on sale
DR Cash at bank
DR Accumulated depreciation
      CR Gain on sale
      CR Cost of PPE

Question 18

Journal entry for loss on disposal of asset

Answer 18

1. Update depreciation expense
   DR Depreciation expense
   CR Accumulated depreciation

2. Gain on sale
DR Cash at bank
DR Accumulated depreciation
DR Loss on sale
      CR Cost of PPE

Question 19

Journal entry for scrapping of asset when carrying amount = 0

Answer 19

1. Update depreciation expense
   DR Depreciation expense
   CR Accumulated depreciation
2. Record scrapping
   DR Accumulated depreciation
   CR Cost of PPE

Question 20

Journal entry for scrapping of asset when carrying amount > 0

Answer 20

1. Update depreciation expense
   DR Depreciation expense
   CR Accumulated depreciation
2. Record scrapping
   DR Accumulated depreciation
   DR Loss on scrapping
   CR Cost of PPE

Question 21

PPE records

Answer 21

• A detailed asset register maintained
  as an internal control procedure to
  protect and efficiently manage the
  PPE
• Subsidiary ledgers are maintained to
  keep details of individual assets

Question 22

Classification of non-current assets (3 categories)

Answer 22

• Property, plant and equipment
• Intangibles
• Agricultural or Biological

Question 23

Average useful life of PPE assets

Answer 23

Too high an estimated useful life will result in understating depreciation expense and overstating profit

Question 24

Average age of PPE assets

Answer 24

A high average age relative to competitors might suggest that the entity’s assets are not as efficient, or that they may be in need of replacement

Question 25

Asset turnover

Answer 25

Asset turnovers provide users some insight into the productivity of an entity’s assets.

Users can determine the entity’s level of efficiency in generating sales from its asset base.

A high level of efficiency is desirable.